Deployment of renewable energy sources to meet the increased demand from a) the energy transition and b) Electric Vehicle (EV) uptake feed into the “4 mega-trends’ driving a step change in electricity consumption”, along with c) dramatically increasing electricity demand in the US as they re-domesticate manufacturing capacity, and d) unprecedented data centre demand growth predominantly driven by AI.
The sky-rocketing demand for renewable energy sources predicted in net zero pathways led to “record investments in renewable technologies”. Renewables are set to outstrip coal next year to become the number one source of electricity worldwide. For example, energy generated by renewable sources accounted for 42% of UK power in 2023, while coal and gas generation fell by 20%. But the electricity grid has not experienced a parallelled level of investment, meaning deployment of renewable energy sources is now hitting a bottleneck, with UK grid connection waiting times reported as more than 10 years and a queue of projects waiting for connection to the USA grid accounting for around 2,600GW of power.
This gridlock for the renewable energy transition has focused attention on the need for much greater transmission capacity, as well as an upgrade of existing infrastructure, if governments are to meet their stated objectives for low emission power sectors.
It has been a bumpy ride for investors in renewable energy technologies over the past ten years. Following outperformance of over 40% for the average thematic climate solutions fund in 2020, they have been glaringly underperforming the broader equity market ever since. Our climate aware equity fund range (Storebrand Plus Funds) aims for long term alignment with the goals of the Paris agreement by seeking exposure to what we call ‘climate beta’. We define this as being overweight companies that we expect to benefit from the transition to a low carbon economy (climate positive exposures) and underweight, or avoiding, companies that we expect to suffer (climate negative exposures).
We believe investments connected to upgrading and expanding the electricity grid will benefit from the transition and so we include them in our allocation to ‘climate solutions’ companies and make allowances in our portfolio construction methodology to ensure our positioning reflects that view.
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